Less Gray Area: Potential Changes to Tax-Exempt Status

While there are many shades of gray, for tax-exempt hospitals, it can seem like the shades are endless when it comes to meeting the tax-exempt requirements. Fortunately there may be a light at the end of the tunnel for hospitals if the federal government enacts the recommendations made by the Government Accountability Office (GAO) in their report, “Tax Administration: Opportunities Exist to Improve Oversight of Hospitals’ Tax-Exempt Status”. These changes could lead to fewer shades of gray and more concrete information to for hospitals to follow. 

Background 

As of January 2021, the American Hospital Association counts more than 5,100 community hospitals in the United States. Of these hospitals, 2,946 are classified as nongovernment not-for-profit hospitals. The Federal government allows these facilities and organizations to be tax exempt because of the public policy concept that the loss of tax revenue from these hospitals is offset by the benefits they provide to the general welfare of the community and the relief the federal government receives from needing to appropriate public funds to pay for them. 

Currently there are three main requirements that hospitals must meet to obtain and maintain tax-exemption. They are: 

• Organizational and Operational Requirements – A hospital must be organized and operate to achieve a charitable purpose – the promotion of health for the benefit of the community. 
• Community Benefits – The six factors identified by IRS that demonstrate community benefit include: 
• Operate an emergency room open to all, regardless of ability to pay 
• Maintain a board of directors drawn from the community 
• Maintain an open medical staff policy 
• Provide care to all patients able to pay, including those who do so through Medicare and Medicaid 
• Use surplus funds to improve facilities, equipment, and patient care 
• Use surplus funds to advance medical training, education, and research 
• Patient Protection and Affordable Care Act (PPACA) Requirements – hospitals must: 
• Conduct a community health needs assessment 
• Maintain a written financial assistance policy 
• Set a limit on charges 
• Set billing and collection limits 

(IRS must review each tax-exempt hospital’s community benefit activities at least once every three years.) 

Findings 

These requirements are great, but what kind of impact are these tax-exempt hospitals having on their community and the country as a whole? That question is part of what drove the GAO report, and they were not able to find much concrete information. The report shared a 2002 Joint Committee on Taxation report that estimated that the federal government forfeited approximately $12.6 billion in tax revenue from tax-exempt hospitals – a number that has surely increased over the past 19 years. The GAO also stated that tax-exempt hospitals reported providing $76 billion in community benefits as recently as 2016. 

In its search to understand how the IRS tracks tax-exempt hospitals, the GAO found that the IRS did not track any of these community benefits and could not identify any tax-exempt hospitals from fiscal years 2015-2019 that were referred to its examination division for review due to insufficient community benefits information. The GAO also found that the IRS has not revoked any hospital’s tax-exempt status in the past 10 years for failing to provide sufficient community benefits. These findings have led the GAO to forward their recommendations to Congress for action. 

Recommendations 

After completing their research, the GAO was able to put forward several recommendations to better track and monitor tax-exempt hospitals to ensure they are meeting the requirements. 

The GAO has advised Congress to consider enacting new legislation that could hold tax-exempt hospitals accountable by the IRS. They found that the principal reason for a lack of accountability is the existing tax laws that do not adequately specify “community benefit requirements.” 

In addition to their Congressional advisement, the GAO also had four recommendations for executive action that would impact the Department of the Treasury and the IRS. These are: 

• The Commissioner of Internal Revenue should update Form 990, including Schedule H and instructions, where appropriate, to ensure that the information demonstrating the community benefits a hospital is providing is clear and can be easily identified by Congress and the public, including the community benefit factors. 
• The Commissioner of Internal Revenue should assess the benefits and costs, including the tax law implications, of requiring tax-exempt hospital organizations to report community benefit expenses on Schedule H by individual facility rather than by collective organization and take action, as appropriate. 
• The Commissioner of Internal Revenue should establish a well-documented process to identify hospitals at risk for noncompliance with the community benefit standard that would ensure hospitals’ community benefit activities are being consistently reviewed. 
• The Commissioner of Internal Revenue should establish specific audit codes for identifying potential noncompliance with the community benefit standard. 

What Does This Mean For Your Hospital? 

With the new administration beginning to enact their plans, there is healthcare reform ahead and the GAO recommendations may play an important role going forward. Tax-exempt hospitals should take this time to review how they determine “community benefit” for their facilities, paying special attention to how program service accomplishments and activities are documented. 

It will be important for hospitals to make sure they are able to show the value of the benefits they are providing their communities on not only a qualitative, but also a quantitative basis. By taking these proactive steps, hospitals can help address and respond to prospective changes that could affect their tax-exempt status, and in turn, affect the communities they serve.